Allen Air Lines must liquidate some equipment that is being replaced. The equipm

Question

Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $15 million, of which 80% has been depreciated. The used equipment can be sold today for $3.75 million, and its tax rate is 30%. What is the equipment's after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.

$   ________

Allen Air Lines must liquidate some equipment that is being replaced. The equipment originally cost $15 million, of which 80% has been depreciated. The used equipment can be sold today for $3.75 million, and its tax rate is 30%. What is the equipment's after-tax net salvage value? Write out your answer completely. For example, 2 million should be entered as 2,000,000.

$   ________

Explanation / Answer

Original Cost of the Equipment : $15000000

Depreciation till date 80% ie $15000000*80%

gives depreciation tilldate $12000000

Book Value as on date : 15000000- 12000000 = $3000000

Sale price today $3750000

Sale price - written down value = $3750000 -  $3000000

ie $750000

Extra Tax on this profit of $750000 @ 30%

$225000

So salvage value is 3750000 - 225000 ie $3525000

Explanation : The written down value gives a tax benefit of 30% and sale value attracts tax expense of 30%. So there is an extra tax expense for sale value - written down value. This extra tax expense is deducted from the market value of the asset as on today to arrive at the salvage value of the asset.

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